The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
Note
1. Description of Business and Summary of Significant Accounting Policies
Nature of operations and basis of presentation
References in these notes to the unaudited condensed consolidated financial statements to “Organovo Holdings, Inc.,” “Organovo Holdings,” “we,” “us,” “our,” “the Company” and “our Company” refer to Organovo Holdings, Inc. and its consolidated subsidiaries. Our consolidated financial statements include the accounts of the Company as well as its wholly-owned subsidiaries, with all material intercompany accounts and transactions eliminated in consolidation. In December 2014, we established a wholly-owned subsidiary, Samsara Sciences, Inc., to focus on the acquisition and curation of qualified cells in support of our commercial and research endeavors. In September 2015, we established another wholly-owned subsidiary in the United Kingdom, Organovo U.K., Ltd., for the primary purpose of establishing a sales presence in Europe.
Since its inception, the Company has devoted its efforts primarily to developing and commercializing a proprietary platform technology to produce and study living tissues that emulate key aspects of human biology and disease, raising capital and building infrastructure. We provide client access to our proprietary ExVive
TM
tissue platform to facilitate drug discovery and development through a range of research services, collaborative agreements, licenses, and grants. We also are applying our therapeutic tissue expertise to progress multiple Investigational New Drug (“IND”) Application track therapeutic programs, focusing on critical unmet medical needs in the liver disease space, including our lead program for NovoTissues® targeting Alpha-1 antitrypsin deficiency, for which we have received orphan drug designation (“ODD”) from the Food and Drug Administration (“FDA”).
The Company’s activities are subject to significant risks and uncertainties including failing to successfully develop products and services based on its technology, failing to achieve regulatory approvals for its therapeutic candidates, and failing to achieve the market acceptance necessary to generate sufficient revenues to support its operations and to achieve and sustain profitability.
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations, stockholders’ equity and cash flows in accordance with generally accepted accounting principles (“GAAP”). The balance sheet at March 31, 2017 is derived from the Company’s audited balance sheet at that date.
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of the Company’s financial position, results of operations, stockholders’ equity and cash flows. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017, filed with the Securities and Exchange Commission (the “SEC”) on June 7, 2017. Operating results for interim periods are not necessarily indicative of operating results for the Company’s fiscal year ending March 31, 2018.
Liquidity
As of December 31, 2017, the Company had cash and cash equivalents of approximately $47.3 million and an accumulated deficit of approximately $226.7 million. The Company also had negative cash flows from operations of approximately $23.2 million during the nine months ended December 31, 2017.
Through December 31, 2017, the Company has financed its operations primarily through the sale of convertible notes, the private placement of equity securities, the sale of common stock through public and at-the-market (“ATM”) offerings, and through revenue derived from product and research service-based agreements, collaborative agreements, grants, and licenses. During the nine months ended December 31, 2017, the Company issued 3,793,758 shares of its common stock through its ATM facility and received net proceeds of approximately $7.1 million.
Based on its current operating plan and available cash resources, the Company has sufficient resources to fund its business for at least the next twelve months from the financial statement issuance date.
6
The Company will need additional
capital to further fund the development and commercialization of its
proprietary platform to produce and study living
tissues that
emulate key aspects of human biology and disease that
can be
used
to facilitate
drug discovery and development,
as
well as i
ts
therapeutic
tissues
focusing on
critical unmet medical needs in the liver disease space
. The Company intends to cover its future operating expenses through cash on hand, through revenue derived from research service agreements, product sales,
collaborat
i
ve
agreements, grants and
license
payments, and through the issuance of additional equity or debt securities. Depending on market conditions,
the Company
cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to
it
or to
its
stockholders.
Having insufficient funds may require us to delay, scale back, or eliminate some or all of our development programs or relinquish rights to our technology on less favorable terms than we would otherwise choose. Failure to obtain adequate financing could eventually adversely affect our ability to operate as a going concern. If we continue to raise additional funds from the issuance of equity securities, there will be substantial dilution to our existing stockholders. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates used in preparing the condensed consolidated financial statements include those assumed in revenue recognized under the proportional performance model, the valuation of stock-based compensation expense, and the valuation allowance on deferred tax assets.
Fair value measurement
The Company had issued warrants, of which some were classified as derivative liabilities as a result of the terms in the warrants that provide for down round protection in the event of a dilutive issuance. The Company used Level 3 inputs (unobservable inputs that are supported by little or no market activity, and that are significant to the fair value of the assets or liabilities) for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions. The Company’s derivative liabilities were adjusted to reflect estimated fair value at each period end, with any increase or decrease in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of the derivative liabilities. Various factors are considered in the pricing models the Company used to value the warrants, including the Company’s current stock price, the remaining life of the warrant, the volatility of the Company’s stock price, and the risk-free interest rate. The remaining warrants expired as of March 31, 2017 and were removed from the Balance Sheet.
Revenue recognition
The Company’s revenues are derived from research service agreements, product sales, and collaborative agreements with pharmaceutical and biotechnology companies, grants from the National Institutes of Health (“NIH”) and private not-for-profit organizations, and license-payments from academic institutions.
The Company recognizes revenue when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) services have been rendered or product has been delivered; (iii) price to the customer is fixed and determinable; and (iv) collection of the underlying receivable is reasonably assured.
Billings to customers or payments received from customers are included in deferred revenue on the balance sheet until all revenue recognition criteria are met. As of December 31, 2017 and March 31, 2017, the Company had approximately $900,000 and $640,000, respectively, in deferred revenue related to its licenses, collaborative agreements, and research service agreements.
7
Revenue arrangements with multiple deliverables
The Company follows ASC 605-25
Revenue Recognition – Multiple-Element Arrangements
for revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. For multiple deliverable agreements, consideration is allocated at the inception of the agreement to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, the Company uses its best estimate of the selling price for the deliverable.
While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect the Company’s results of operations.
The Company periodically receives license fees for non-exclusive research licensing associated with funded research projects. License fees under these arrangements are recognized over the term of the contract or development period as it has been determined that such licenses do not have stand-alone value.
Revenue from research service agreements
For research service agreements that contain only a single or primary deliverable, the Company defers any up-front fees collected from customers, and recognizes revenue for the delivered element only when it determines there are no uncertainties regarding customer acceptance. For agreements that contain multiple deliverables, the Company follows ASC 605-25 as described above.
Research and development revenue under collaborative agreements
The Company’s collaboration revenue consists of license and collaboration agreements that contain multiple elements, which may include non-refundable up-front fees, payments for reimbursement of third-party research costs, payments for ongoing research, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.
The Company recognizes revenue from research funding under collaboration agreements when earned on a “proportional performance” basis as research services are provided or substantive milestones are achieved. We recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. A milestone is considered substantive when the consideration payable to us for the milestone (i) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance, (ii) relates solely to our past performance and (iii) is reasonable relative to all of the other deliverables and payments within the arrangement. In making this assessment, we consider all facts and circumstances relevant to the arrangement, including factors such as the risks that must be overcome to achieve the milestone, the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables.
The Company initially defers revenue for any amounts billed or payments received in advance of the services being performed, and recognizes revenue pursuant to the related pattern of performance, using the appropriate method of revenue recognition based on its analysis of the related contractual element(s).
In November 2014, the Company entered into a collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing bioprinted tissues for surgical transplantation research. The Company has recorded $0 and $7,000 for the three months ended December 31, 2017 and 2016 and $0 and $32,000 for the nine months ended December 31, 2017 and 2016, respectively, in revenue related to this collaboration in recognition of the proportional performance achieved.
The Company has completed its obligations under this agreement as of November 30, 2016.
In April 2015, the Company entered into a research collaboration agreement with a third party to develop custom tissue models for fixed fees. Based on the proportional performance achieved under this agreement, $0 and $150,000 in collaboration revenue was recorded for the three and nine months ended December 31, 2017, respectively, and $117,000 in collaboration revenue was recorded
8
for the three and
nine
months ended
December
3
1
, 2016
.
Approximately $
620
,000
in collaboration revenue has been recognized to date under this agreement as of
December
3
1
, 2017.
The Company has completed
its obligations under this agreement as of
September
3
0
, 2017.
Also in April 2015, the Company entered into a multi-year research agreement with a third party to develop multiple custom tissue models for use in drug development. Approximately $0 and $0 were recorded as revenue in recognition of the proportional performance achieved under this agreement during the three and nine months ended December 31, 2017, respectively. Approximately $302,000 and $835,000 were recorded as revenue in recognition of the proportional performance achieved under this agreement during the three and nine months ended December 31, 2016, respectively.
In June 2016, the Company announced it had entered into another collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing bioprinted tissues for skeletal disease research. The Company received an up-front payment in June 2016, which was initially recorded as deferred revenue. Revenue of $18,000 and $53,000 has been recorded under this agreement during the three and nine months ended December 31, 2017, respectively. Revenue of $17,000 has been recorded under this agreement during the three and nine months ended December 31, 2016.
In December 2016, the Company signed another collaborative non-exclusive research affiliation with a university medical school and a non-profit medical charity, under which the Company received a one-time grant from the charity towards the placement of a NovoGen Bioprinter at the university for the purpose of developing an architecturally correct kidney for potential therapeutic applications. The Company received an up-front payment in January and March of 2017, which has been recorded as deferred revenue. Revenue of $10,000 and $29,000 has been recorded under this agreement for the three and nine months ended December 31, 2017, respectively. No revenue had been recorded under this agreement during the three and nine months ended December 31, 2016, respectively, as the printer had not yet been installed at the university as of December 31, 2016.
In April 2017, the Company signed a collaborative non-exclusive research affiliation with a university, under which the Company received a one-time non-refundable payment toward the placement of a NovoGen Bioprinter at the university for the purpose of specific research projects mutually agreed upon by the university and the Company in the field of volumetric muscle loss. The Company received an up-front payment in May of 2017, which has been recorded as deferred revenue. Revenue of approximat
ely $14,000 and $28,000 has been recorded under this agreement for the three and nine months ended December 31, 2017, respectively, beginning subsequent to the installation of the printer in July of 2017. In addition, during April of 2017, the Company signed a non-exclusive patent license agreement with the university including an annual fee of $75,000 for each of the two years for the license to the Company Patents for research use limited to the field of volumetric muscle loss. The Company received the first annual payment of $75,000 in April of 2017, which was initially recorded as deferred revenue. Revenue of $18,750 and $56,250 has been recorded under this agreement for the three and nine months ended December 31, 2017.
In September 2017, the Company entered into an agreement with a company, under which the Company received a one-time non-refundable payment of $50,000 for limited use of a Company patent in reference to four bioprinters developed and placed at research and academic facilities. The Company has recorded $0 and $50,000 in revenue for the three months and nine months ended December 31, 2017, respectively.
Product revenue
The Company recognizes product revenue at the time of delivery to the customer, provided all other revenue recognition criteria have been met.
We expect to establish a reserve for estimated product returns that will be recorded as a reduction to revenue. This reserve will be maintained to account for future return of products sold in the current period. The reserve will be reviewed quarterly and will be estimated based on an analysis of our historical experience related to product returns.
Grant revenue
During August 2013, the Company was awarded a research grant by a private, not-for-profit organization for up to $251,700, contingent on go/no-go decisions made by the grantor at the completion of each stage of research as outlined in the grant award. Revenues from the grant are based upon internal costs incurred that are specifically covered by the grant, plus an additional rate that provides funding for overhead expenses. Revenue is recognized when the Company incurs expenses that are related to the grant. Revenue recognized under this grant was approximately $0 and $9,000 for the three months ended December 31, 2017 and 2016,
9
respectively,
and $
0
and $
21
,000
for the
nine
months ended
December
3
1
, 2017 and 2016, respectively. The Company has completed its obligations under this agreement as of
March 31
, 2017.
During
July 2017, the NIH awarded the Company a research grant totaling approximately $1,657,000. The grant provides for fixed payments based on the achievement of certain milestones. Revenue is recognized upon completion of substantive milestones. Revenue recognized under this grant was approximately $260,000 and $409,000 for the three and nine months ended December 31
,
2017, respectively.
Cost of revenues
The Company reported approximately $0.2 million and $0.7 million in cost of revenues for the three and nine months ended December 31, 2017, respectively. The Company reported approximately $0.2 million and $0.8 million in cost of revenues for the three and nine months ended December 31, 2016, respectively. Cost of revenues consists of our costs related to manufacturing and delivering our product and service revenue.
Net loss per share
Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. The weighted-average number of shares used to compute diluted loss per share excludes any assumed exercise of stock options and warrants, shares reserved for purchase under the Company’s 2016 Employee Stock Purchase Plan (“ESPP”), the assumed release of restriction of restricted stock units, and shares subject to repurchase as the effect would be anti-dilutive. No dilutive effect was calculated for the three and nine months ended December 31, 2017 or 2016, as the Company reported a net loss for each respective period and the effect would have been anti-dilutive.
Common stock equivalents excluded from computing diluted net loss per share were approximately 14.0 million at December 31, 2017, and 12.7 million at December 31, 2016.
Note
2. Stockholders’ Equity
Stock-based compensation expense and valuation information
Stock-based compensation expense for all stock awards consists of the following (in thousands):
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Research and development
|
$
|
210
|
|
|
$
|
444
|
|
|
$
|
925
|
|
|
$
|
1,231
|
|
General and administrative
|
$
|
1,040
|
|
|
$
|
1,574
|
|
|
$
|
4,675
|
|
|
$
|
4,309
|
|
Total
|
$
|
1,250
|
|
|
$
|
2,018
|
|
|
$
|
5,600
|
|
|
$
|
5,540
|
|
The total unrecognized compensation cost related to unvested stock option grants as of December 31, 2017 was approximately $6,710,000 and the weighted average period over which these grants are expected to vest is 2.54 years.
The total unrecognized compensation cost related to unvested restricted stock units (not including performance-based restricted stock units) as of December 31, 2017 was approximately $4,768,000, which will be recognized over a weighted average period of 2.98 years.
The total unrecognized compensation cost related to unvested performance-based restricted stock units as of December 31, 2017 was approximately $317,000 which will be recognized over a weighted average period of 2.25 years.
As of December 31, 2017, there was no unrecognized stock-based compensation expense for restricted stock awards.
The total unrecognized stock-based compensation cost related to unvested employee stock purchase plan (“ESPP”) shares as of December 31, 2017 was approximately $10,000, which will be recognized over a period of 2 months.
10
The Company calculates the grant date fair value of all stock-based awards in determining the stock-based
compensation expense. Stock-based awards include (i) stock options, (ii) restricted stock awards, (iii) restricted stock units,
(iv) performance-based restricted stock units,
and (v) rights to purchase stock under the 2016 Employee Stock Purchase Plan.
The Company uses the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Volatility
|
|
|
80.71
|
%
|
|
|
72.99
|
%
|
|
|
76.86
|
%
|
|
|
72.08
|
%
|
Risk-free interest rate
|
|
|
2.15
|
%
|
|
|
1.68
|
%
|
|
|
1.81
|
%
|
|
|
1.13
|
%
|
Expected life of options
|
|
6.00 years
|
|
|
6.00 years
|
|
|
6.00 years
|
|
|
6.00 years
|
|
Weighted average grant
date fair value
|
|
$
|
1.04
|
|
|
$
|
2.14
|
|
|
$
|
1.73
|
|
|
$
|
2.43
|
|
The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. Due to the Company’s limited historical data as an early-stage commercial business, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. The risk-free interest rate assumption was based on U.S. Treasury rates. The weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting term of the options. Certain options granted to consultants are subject to variable accounting treatment and are required to be revalued until vested.
The fair value of each restricted stock unit and performance-based restricted stock unit is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.
The fair value of each restricted stock award is recognized as stock-based compensation expense over the vesting term of the award. The fair value is based on the closing stock price on the date of the grant.
The Company uses the Black-Scholes valuation model to calculate the fair value of shares issued pursuant to the Company’s ESPP. Stock-based compensation expense is recognized over the purchase period using the straight-line method. The fair value of ESPP shares was estimated at the purchase period commencement date using the following assumptions:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
December 31, 2017
|
|
|
December 30, 2016
|
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Volatility
|
|
43.03%
|
|
|
72.89%
|
|
|
43.03 - 74.70%
|
|
|
72.89%
|
|
|
Risk-free interest rate
|
|
1.10%
|
|
|
0.47%
|
|
|
0.79 - 1.10%
|
|
|
0.47%
|
|
|
Expected term
|
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
|
6 months
|
|
|
Grant date fair value
|
|
$
|
0.52
|
|
|
$1.22
|
|
|
$0.52 - $1.04
|
|
|
$1.22
|
|
|
The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. For the first full year of ESPP offering periods, beginning September 1, 2016, due to the Company’s limited historical data as an early-stage commercial business, the estimated volatility incorporates the historical and implied volatility of comparable companies whose share prices are publicly available. As of September 1, 2017 and the beginning of the second year of ESPP offering periods, the Company is using our Company-specific volatility rate. The risk-free interest rate assumption was based on U.S. Treasury rates. The expected life is the 6-month purchase period.
11
Preferred stock
The Company is authorized to issue 25,000,000 shares of preferred stock. There are no shares of preferred stock currently outstanding, and the Company has no current plans to issue shares of preferred stock.
Common stock
On April 24, 2017, the Company filed a Registration Statement on Form S-8 with the SEC authorizing the issuance of 2,297,034 shares of the Company’s common stock, pursuant to the terms of an Incentive Award Stock Option Agreement and an Incentive Award Performance-Based Restricted Stock Unit Agreement (collectively, the “Incentive Award Agreements”).
In December 2014, the Company entered into an equity offering sales agreement, or the 2014 Sales Agreement, with an investment banking firm. In July 2016, the Company registered the sale of up to $26.6 million of common stock under the 2014 Sales Agreement pursuant to its shelf registration statement on Form S-3 (File No. 333-202382),
or the 2015 Shelf, that expires on March 17, 2018.
During the three and nine months ended December 31, 2017, the Company issued 2,255,541 and 3,793,758 shares of common stock, respectively, for net proceeds of $3.1 million and $7.1 million, respectively, in at-the-market offerings under the 2014 Sales Agreement. During the three and nine months ended December 31, 2016, the Company issued 0 and 997,181 shares of common stock, respectively, for net proceeds of $0 and $4.5 million, respectively. As of December 31, 2017, the Company has sold an aggregate of 5,790,939 shares of common stock in at-the-market offerings under the 2014 Sales Agreement, with net proceeds of approximately $17.9 million. Based on sales through December 31, 2017, the Company can sell an additional $14.6 million of shares pursuant to the 2014 Sales Agreement under the 2015 Shelf prior to March 17, 2018. The Company intends to use the net proceeds raised through any at-the-market sales for general corporate purposes, including research and development, the commercialization of the Company’s products, general administrative expenses, and working capital and capital expenditures.
During the three months ended December 31, 2017 and 2016, the Company issued 0 and 207,500 shares of common stock upon the exercise of 0 and 207,500 warrants, respectively. During the nine months ended December 31, 2017 and 2016, the Company issued 0 and 330,604 shares of common stock up on the exercise of 0 and 367,500 warrants, respectively.
During the three months ended December 31, 2017 and 2016, the Company issued 0 and 39,005 shares of common stock upon the exercise of 0 and 39,005 stock options, respectively. During the nine months ended December 31, 2017 and 2016, the Company issued 500,000 and 245,271 shares of common stock upon the exercise of 500,000 and 245,271 stock options, respectively.
Restricted stock units
A summary of the Company’s restricted stock unit (not including performance-based restricted stock units) activity from March 31, 2017 through December 31, 2017 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Price
|
|
Unvested at March 31, 2017
|
|
|
1,178,114
|
|
|
$
|
3.57
|
|
Granted
|
|
|
1,959,678
|
|
|
$
|
2.62
|
|
Vested
|
|
|
(451,587
|
)
|
|
$
|
3.27
|
|
Cancelled / forfeited
|
|
|
(533,233
|
)
|
|
$
|
2.91
|
|
Unvested at December 31, 2017
|
|
|
2,152,972
|
|
|
$
|
2.93
|
|
Performance-based restricted stock units
On April 24, 2017, in connection with the appointment of a new Chief Executive Officer (“CEO”), the Company allocated 208,822 Performance-Based Restricted Stock Units (“PBRSUs”) outside of the 2012 Plan. The Company intends for these to be “inducement awards” within the meaning of NASDAQ Marketplace Rule 5635(c)(4). While outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. On August 23, 2017, the Board of Directors formally approved the vesting criteria for the PBRSUs allocated by the Company on April 24, 2017. The units are divided into five separate tranches each with independent vesting criteria. The first four tranches have performance criteria related to annual revenue goals with measurement at the end of fiscal year 2018 (20 percent), fiscal year 2019 (20 percent), fiscal year 2020 (20 percent), and fiscal year 2021 (20 percent). The fifth tranche has a performance metric related to a path to profitability goal measured as Negative Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) achievable at any point between the grant date and the end of fiscal year 2020 (20 percent). The number of units that ultimately vest for each tranche will range from 0 percent to 120 percent of the target amount, not to exceed 208,822 in aggregate. As of December 31,
12
2017,
no
tranches had vested
and 0
% of current year tranche
is
expected to vest
, but 120% of the Negative Adjusted EBITDA tranche is expected to vest in a future year
.
The grant date fair values of the tranches are collectively $393,000 of which one-fifth is being recognized over each tranches’ service period. The Company began recording stock-based compensation expense for these tranches after the August 23, 2017 grant date when the financial performance goals were established and approved. As of December 31, 2017, PBRSUs from the Negative Adjusted EBITDA tranche are expected to vest in the amount of 50,117 shares.
A summary of the Company’s performance-based restricted stock unit activity from March 31, 2017 through December 31, 2017 is as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average Price
|
|
Unvested at March 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
208,822
|
|
|
$
|
1.88
|
|
Vested
|
|
|
—
|
|
|
$
|
—
|
|
Cancelled / forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Unvested at December 31, 2017
|
|
|
208,822
|
|
|
$
|
1.88
|
|
Stock options
On April 24, 2017, in connection with the appointment of a new CEO, the Company granted 2,088,212 stock options outside of the 2012 Plan. The Company intends for these to be “inducement awards” within the meaning of NASDAQ Marketplace Rule 5635(c)(4). While granted outside the Company’s 2012 Plan, the terms and conditions of these awards are consistent with awards granted to the Company’s executive officers pursuant to the 2012 Plan. These stock options vest
over a four-year period with a quarter vesting on the one year anniversary of the vesting commencement date.
A summary of the Company’s stock option activity from March 31, 2017 to December 31, 2017 is as follows:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 31, 2017
|
|
|
10,956,201
|
|
|
$
|
4.63
|
|
|
$
|
4,876,437
|
|
Options granted
|
|
|
2,370,168
|
|
|
$
|
2.64
|
|
|
$
|
—
|
|
Options cancelled / forfeited
|
|
|
(1,394,217
|
)
|
|
$
|
5.07
|
|
|
$
|
—
|
|
Options exercised
|
|
|
(500,000
|
)
|
|
$
|
1.65
|
|
|
$
|
235,000
|
|
Outstanding at December 31, 2017
|
|
|
11,432,152
|
|
|
$
|
4.30
|
|
|
$
|
783,962
|
|
Vested and Exercisable at December 31, 2017
|
|
|
7,177,206
|
|
|
$
|
4.88
|
|
|
$
|
783,962
|
|
The weighted average remaining contractual term of options exercisable and outstanding at December 31, 2017 was approximately 5.1 years.
Employee Stock Purchase Plan
In June 2016, our Board of Directors adopted, and in August 2016 stockholders subsequently approved, the 2016 Employee Stock Purchase Plan (“ESPP”). We reserved 1,500,000 shares of common stock for issuance thereunder. The ESPP permits employees after five months of service to purchase common stock through payroll deductions, limited to 15 percent of each employee’s compensation up to the lower of $25,000 or 10,000 shares per employee per year. Shares under the ESPP are purchased at 85 percent of the fair market value at the lower of (i) the closing price on the first trading day of the six-month purchase period or (ii) the closing price on the last trading day of the six-month purchase period. The initial offering period commenced in September 2016. At December 31, 2017, there were 1,372,960 shares available for purchase under the ESPP.
13
Warrants
The following table summarizes warrant activity for the nine months ended December 31, 2017:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Balance at March 31, 2017
|
|
|
221,370
|
|
|
$
|
7.16
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
Cancelled
|
|
|
(1,370
|
)
|
|
$
|
2.28
|
|
Balance at December 31, 2017
|
|
|
220,000
|
|
|
$
|
7.19
|
|
The warrants outstanding at December 31, 2017 are exercisable at prices between $6.84 and $7.62 per share, and have a weighted average remaining term of approximately 1.46 years.
Common stock reserved for future issuance
Common stock reserved for future issuance consisted of the following at December 31, 2017:
Common stock warrants outstanding
|
|
|
220,000
|
|
Common stock options outstanding under the 2008 Plan
|
|
|
622,192
|
|
Common stock options outstanding and reserved under the 2012 Plan
|
|
|
12,026,320
|
|
Common stock reserved under the 2016 Employee Stock Purchase Plan
|
|
|
1,372,960
|
|
Restricted stock units outstanding under the 2012 Plan
|
|
|
2,152,972
|
|
Common stock options outstanding and reserved under the Incentive Award Agreements
|
|
|
2,088,212
|
|
Restricted stock units outstanding under the Incentive Award Agreements
|
|
|
208,822
|
|
Total at December 31, 2017
|
|
|
18,691,478
|
|
Note 3. Commitments and Contingencies
Operating leases
The Company leases laboratory and office space in San Diego, California under two non-cancelable leases as described below.
Since July 2012, the Company has leased its main facilities at 6275 Nancy Ridge Drive, San Diego, California 92121. The lease, as amended in 2013, 2015 and 2016, consists of approximately 45,580 rentable square feet containing laboratory, clean room and office space. Monthly rental payments are currently approximately $120,000 per month with 3% annual escalators. The lease term for 14,685 of the total rentable square footage expires on December 15, 2018, with the remainder of the rentable square footage expiring on September 1, 2021 with the Company having an option to terminate this lease on or after September 1, 2019.
On January 9, 2015, the Company entered into an agreement to lease a second facility consisting of 5,803 rentable square feet of office and lab space located at 6310 Nancy Ridge Drive, San Diego, California 92121. The term of the lease is 36 months, beginning on February 1, 2015 and ending on January 31, 2018, with monthly rental payments of approximately $12,000 commencing on April 1, 2015. In addition, there are annual rent escalations of 3% on each 12-month anniversary of the lease commencement date.
In addition to these two leases, the Company leased a third facility from February 1, 2016 through January 31, 2017, consisting of 12,088 rentable square feet of office space located at 6166 Nancy Ridge Drive, San Diego, California 92121 with a monthly rent of $15,000.
The Company records rent expense on a straight-line basis over the life of the leases and records the excess of expense over the amounts paid as deferred rent. In addition, one of the leases provides for certain improvements made for the Company’s benefit to be funded by the landlord. Such costs, totaling approximately $518,000 to date, have been capitalized as fixed assets and included in deferred rent.
Rent expense was approximately $362,000 and $307,000 for the three months ended December 31, 2017 and 2016, respectively, and $1,094,000 and $912,000 for the nine months ended December 31, 2017 and 2016, respectively.
14
Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of
December
3
1
, 2017, are as follows (in thousands):
Fiscal year ended March 31, 2018
|
|
$
|
388
|
|
Fiscal year ended March 31, 2019
|
|
|
1,465
|
|
Fiscal year ended March 31, 2020
|
|
|
1,073
|
|
Fiscal year ended March 31, 2021
|
|
|
1,104
|
|
Fiscal year ended March 31, 2022
|
|
|
467
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
4,497
|
|
Legal matters
In addition to commitments and obligations in the ordinary course of business, the Company may be subject, from time to time, to various claims and pending and potential legal actions arising out of the normal conduct of its business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing litigation contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against it may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of its potential liability.
The Company regularly reviews contingencies to determine the adequacy of its accruals and related disclosures. During the period presented, the Company has not recorded any accrual for loss contingencies associated with such claims or legal proceedings; determined that an unfavorable outcome is probable or reasonably possible; or determined that the amount or range of any possible loss is reasonably estimable. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against the Company in a reporting period, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
Note 4. Concentrations
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments. The Company maintains cash balances at various financial institutions primarily located within the United States. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation. Balances may exceed federally insured limits. The Company has not experienced losses in such accounts, and management believes that the Company is not exposed to any significant credit risk with respect to its cash and cash equivalents.
The Company is also potentially subject to concentrations of credit risk in its revenues and accounts receivable. Because it is in the early commercial stage, the Company’s revenues to date have been derived from a relatively small number of customers and collaborators. However, the Company has not historically experienced any accounts receivable write-downs and management does not believe significant credit risk exists as of December 31, 2017.
Note 5. Related Parties
The Company has entered into two agreements with related parties in the ordinary course of its business and on terms and conditions it believes are as fair as those it offers and receives from independent third parties. Each agreement was ratified by the Company’s Board of Directors or a committee thereof pursuant to its related party transaction policy. In August 2017, the Company entered into a services agreement with Cirius Tx, Inc., an entity for which Robert Baltera, Jr., a director of the Company, serves as Chief Executive Officer. Under this agreement and its amendments, the Company has provided ExVive™ Liver Tissue Services for Cirius amounting to $44,000 and $94,000 in the three and nine months ended December 31, 2017, respectively. The agreement contains another $74,000 of ExVive™ Liver Tissue Services to be completed in the fourth quarter of fiscal 2018.
In November 2017, the Company entered into a collaboration agreement with Viscient Biosciences, an entity which Keith Murphy, a former director and Chief Executive Officer of the Company, serves as Chief Executive Officer. Under this agreement, the parties intend to develop a custom research platform for studying liver disease. The Company expects the platform to expand its current service portfolio for compound screening in disease models, which aids the drug discovery work for other customers. Viscient intends
15
to target early discovery work for non-alcoholic fatty liver disease (“NAFLD”) and non-alcoh
olic steatohepatitis (“NASH”).
Under this agreement
and its amendments
, the Company will provide research services to Viscient
amounting to $
323
,000 to be completed in fiscal 2018.
For the three and
nine
months ended
December
3
1
, 2017,
$323,000 of revenue was recognized related to this agreement
.
Note 6. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles (“GAAP”) when it becomes effective. The new standard was originally effective for public companies for annual reporting periods beginning after December 15, 2016, with no early application permitted. In August 2015, the FASB issued ASU No. 2015-14 that defers by one year the effective date for all entities, with application permitted as of the original effective date. The updated standard becomes effective for us on April 1, 2018, with early adoption permitted as of April 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is still evaluating the effect this update will have on our consolidated financial statements and our disclosure requirements under the new guidance. The Company will continue to evaluate additional changes, modifications or interpretations to the guidance which may impact the current conclusions. The Company expects to adopt the new standard for the fiscal year beginning April 1, 2018 and anticipates that the modified retrospective application method will be applied.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires an entity to recognize lease assets and lease liabilities on the balance sheet for leases with terms of more than 12 months and to disclose key information about leasing arrangements. This new guidance is effective for us on April 1, 2019, with early adoption permitted in any interim or annual period. The Company is currently evaluating the impact that this guidance will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718), which requires an entity recognize excess tax benefits and deficiencies as income tax expense or benefit, the cash flows of which should be included as operating activity in the statement of cash flows. An entity is allowed to either continue accruing compensation cost based on expected forfeitures or to begin recognizing expense as forfeitures occur. In addition, an entity may withhold the maximum statutory tax, increasing the allowable cash settlement portion of awards. The cash paid by an employer when directly withholding shares for tax purposes should be included in the financing activity section of the statement of cash flows. This new guidance became effective for us on April 1, 2017. The requirements of ASU 2016-09 did not have a significant impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which provides clarity and guidance around which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual reporting periods. The adoption of this guidance will have no impact on our financial statements unless we have modification accounting in accordance with Topic 718.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. These amendments simplify the accounting for certain financial instruments with down round features. The amendments require companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance will have no impact on our financial statements as the Company’s only derivative liabilities were all exercised or expired as of March 31, 2017 and were removed from the Balance Sheet.
In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”). The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities.
We are currently in the early stages of evaluating the financial statement impact of the 2017 Act. Based on initial assessments, we expect significant adjustments to our gross deferred tax assets and liabilities; however, we also expect to record a corresponding offset
16
to our estimated full valuation allowance against our net deferred tax assets, which should result in minimal net effect to our provision fo
r income taxes.
In accordance with
SEC issued guidance under
Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”)
, we have not recorded any
provisional
income tax effects of the 2017 A
ct
in our fina
ncial statements
as our anticipated impact is minimal and we do
not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete accounting for the change in tax law.
Note 7. Subsequent Events
During January 2018, the Company issued 1.5 million shares of its common stock pursuant to its at-the-market (“ATM”) facility for net proceeds exceeding $2.1 million.
17